Sam's Settles for $300,000

Since many people on this site are familiar with Sam's, a large retailer here in Chicago, and some do mail order business with the store, I thought you would like to know about this. Also, we periodically have discussions here about the mandatory three-tier distribution system that is unique to the beverage alcohol industry and is a vestige of the repeal of Prohibition.

What follows is a Chicago Tribune story published today. The story as written is a little unclear but what I believe it means to say is that Sam's allegedly set up an illegal distributorship called Skyline. When the article refers to "liquor distributors," I believe it really means--in the parlance of the three-tier system--liquor producers. I'm not sure that's what happened, but the story makes a lot more sense that way.

I'll do a little more research and if I'm reading this wrong, I'll post a correction. Obviously, if anyone else knows more about this incident, please fill in the blanks.

After a 17-month stalemate over the state's allegations that Sam's Wine and Spirits was extorting money from liquor distributors and operating an illegal marketing firm and warehouse, the giant liquor store has agreed to settle the case, Illinois Liquor Control Commission officials said Monday.

Sam's agreed to pay a record $300,000 fine and shut down for the first three days of 2007, state regulators announced Monday.

If the Lincoln Park retailer pays the fine on time it would end a nearly two-year investigation into its business practices. If the case had gone to hearings on the citations, regulators had promised to seek revocation of the store's liquor license. Sam's has annual sales of about $60 million at the Lincoln Park location.

Sam's President Darryl Rosen said the family-owned company is relieved to move on.

"Our position up front was that we did nothing wrong and that's still our position," Rosen said, pointing out that the settlement language allowed the company to stop short of admitting wrongdoing. It did acknowledge the state had evidence to substantiate some of its claims.

He said the decision to settle now was an admission that the ongoing legal battle was too taxing and distracting for the company, and the risks of losing the case were too great.

"Something had to happen. There either had to be an agreement or there had to be a hearing--and when the prosecutor says in the paper that he's going to revoke your license when you've operated without incident for sixty years," the company felt pressured to settle.

While officials called the fine the "largest ever" levied by the commission since its 1934 creation, it is substantially less than the $1 million penalty sources said the state was seeking from Sam's.

The agreement also requires Sam's to remove all alcohol from a nearby warehouse on Kingsbury Street by May 31. Rosen said the company has complied with that order and is seeking to sublet the rented building.

Liquor industry officials in Chicago, especially those in the wine trade, closely watched the case. Because of its size, Sam's wields tremendous influence in the liquor business.

According to the state's initial complaint, Sam's set up a company called Skyline Marketing Co. to extort money from liquor distributors, requiring them to make payments to Skyline if they wanted to sell their products at the store.

The state alleges that Sam's illegally paid business expenses, including some employee salaries, out of the income Skyline received from distributors. Liquor laws prohibit retailers from having marketing relationships with liquor suppliers.

Rosen maintained Monday that Skyline, which maintained its office in the store's building, had no direct ties to Sam's.

Sam's has developed a national reputation among wine connoisseurs with the volume and variety of its stock.

Since the investigation began, the Rosen family has branched out with new stores in Downers Grove and Highland Park.

The settlement calls for the store to pay $150,000 by cashier's check immediately, and another check for the same amount by Dec. 29 of this year. If Sam's fails to pay the fine, the state will suspend the firm's license for another four days, according to the agreement. Rosen said that he had already paid the first $150,000 and would pay the rest when it is due in December.

If the rest of the fine is paid, Sam's will be closed for business Jan. 1-3, 2007, according to the agreement. Coming right after the holiday rush, Rosen said those three days are not big revenue days.

This is purely speculation, but it sounds to me like they had a mini-distributorship happening--almost like a fourth tier, but in between the second and third--and were charging the other distibutors (ie. the traditional second tier) to store their products there until they could be absorbed by the actual retail locations.

While I'm quite sure this would be illegal, it would be a great setup for a business...a seperate location (likely in much lower-rent area), from which you could feed your high rent stores, on demand. You wouldn't have to waste storage space on product at any one store, the purchasing power of having everything delivered to one spot would be incredible, and the ability to ship stock from one location to another anytime, without relying on a distibutors operating hours, would be outstanding...too bad it all illegal!

300k from a place that sells 60m a year...whats that like 2 average days sales, and shutting them down on what have to be the three slowest days of the year? The board should have at least tried to figure out what this 2 year long investigation cost them and settled for that amount, I'm gonna say that 150k a year barely covers 3 detectives, much less any prosecutors or actual day to day expenses they might have accrued during this time! Pure government waste trying to diguise itself as protecting the public interest! Okay, I'm getting down now

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As long as you have good whiskey you're not "unemployed", you're "Funemployed!!!"

It's a bit disturbing that we have to guess at what exactly is being alleged here. The Sun-Times article and the official release from the Illinois Liquor Control Commission did not provide much additional illumination.

It is possible that the vagueness of the allegations indicates weakness in the state's case. That part of the story is coming from the ILCC only.

I did note in those other two sources something the Tribune didn't mention, that part of the settlement includes a requirement that Sam's post at its cash registers "a notice stating that other retail liquor licensees are not permitted by law to purchase alcoholic beverages from the licensee."

It has long been an open secret in the industry locally that many small bars, specifically those that operate on a shoestring and can't get credit from the distributors, basically buy their stock at Sam's with cash from the register, sometimes making several trips there a day/night. That's why Sam's, unlike most retailers, carries liters.

I think that the liquor industry is about to face some more heat from multiple directions. I noticed last night that High Times Wine cellars in California has a notice on its website that states that it is not shipping liquor at this time, only wine and beer. Bevmo, another Southern Cal. retailer only ships within the state. Various states in the US have sued online retailers over loss of liquor tax revenue. A recent article stated that Pennsylvania set up 4 or more outlet liquor super stores near each of its surrounding states borders in order to keep its residents from "traveling to other states to buy cheaper alcohol". Ironically, they don't mention the possibility of the other states residents crossing into PA. to buy. I live 45 minutes fro the Pa. line and go there to buy what Ohio doesn't/won't carry, price not necessarily an issue. The difference in the price of a like bottle in each state is more than wiped out by the price of gasoline to drive there! In Ohio, you are allowed up 5 liters of any distilled spirits that Ohio sells to be brought in from elsewhere in any given trip!

It's a bit disturbing that we have to guess at what exactly is being alleged here. The Sun-Times article and the official release from the Illinois Liquor Control Commission did not provide much additional illumination.

It is possible that the vagueness of the allegations indicates weakness in the state's case. That part of the story is coming from the ILCC only.

it is tough to know. I'm sure it's partly true that Sam's didn't want to go to trial and possibly lose their license. Who wants to put a 60 mi. business in the hands of a court? not me. Not unless I have no other choice. It does sound like some "liberties" were taken though.

I found an intersting article while searching for information on this story.....it was back from late 90's saying that Sams was in talks to sell off to bevmo. Since that never happened...does anyone know why?

only thing I can think of that could possibly also be related to this....a while back I was checking the ups.com website regarding their terms on shipping alcohol.

What i found was that it says they will only ship beer and wine not alcohol and you have to be a licensed to ship alcohol. (i've actually been denied by UPS to return a package to bevmo that was sent UPS because i wasn't licensed.)

(h) The only alcoholic beverages that UPS accepts for transportation are wine and beer. Packages containing wine and beer are accepted for transportation only from shippers who are licensed and authorized under applicable laws to ship alcohol and only on a contractual basis. To receive service for packages containing wine or beer, the shipper must sign a contract and agree to the provisions set forth in the approved UPS agreement for the transportation of wine or beer. All packages containing wine or beer must have a UPS label requesting an adult signature upon delivery. It is the responsibility of the shipper to ensure that a shipment tendered to UPS does not violate any federal, state, provincial or local laws or regulations applicable to the shipment. All shipments, including shipments containing wine or beer, will be accepted for transportation only according to the terms and conditions contained in the UPS Tariff.

My recent shipment, and all others from Hi Time IIRC, arrived via FedEx, not UPS. However, there may have been a recent change in FedEx's policy for some unknown reason. I sense a shadow spreading across the land.

My recent shipment, and all others from Hi Time IIRC, arrived via FedEx, not UPS. However, there may have been a recent change in FedEx's policy for some unknown reason. I sense a shadow spreading across the land.

Yours truly,
Dave Morefield

Dave...was just checking out Fedex...from what I read it looks like they will only ship Alcohol, beer or wine from Licensee to Licensee.

Licensee to Licensee (L2L) – FedEx Express® and FedEx Ground® service within the U.S.
FedEx will accept legal shipments of wine, beer, liquor, or spirits when both the shipper and recipient are licensed wholesalers, distributors, dealers, manufacturers, retailers or importers. Please refer to the Wine Shipping State Pairing guide.

For Licensee to Consumer they only accept wine.
Licensee to Consumer (L2C), wine only – FedEx Express®, FedEx Ground® and FedEx Home Delivery® service within the U.S.
Refer to the Wine Shipping State Pairing guide for state-to-state specifics. FedEx will accept legal wine shipments only from a licensed entity to a consumer originating and terminating in one of the states listed in the State Pairings guide as a reciprocal, direct ship, intrastate or on-site purchase state.